Wednesday, November 06, 2019

Direct Tax - I Solved Papers: Nov' 2014


2014
 (November)
COMMERCE (Speciality)
Course: 504
The figures in the margin indicate full marks for the questions
1. (a) Write True or False:             1x4=4
a)      Body of individuals should consist of individuals only.                              True
b)      Once a person is a resident in a previous year, he shall be deemed to be resident for subsequent previous year also.                       False
c)       Retrenchment compensation received by a workman at the time of his retrenchment is exempt under Section 10 (10B) to the maximum extent of Rs. 5,00,000.                               True
d)      Municipal tax is a deduction from net annual value.                 False, from Gross Annual value
(b) Fill in the blanks:                    1x4=4

a)      A new business was set up on 15.10.2013 and it commenced its business from 01.12.2013. The first previous year in this case shall be 15.10.2013 to 31.03.2014.
b)      Monthly pension received by a government employee is fully taxable.
c)       Dividend received by a company from a domestic company is exempt.
d)      Total income of a person is determined on the basis of residential status in India.
2. Write short notes on the following:                    4x4=16
a)      Income tax law in India.
Ans: Income Tax Law in India: The income tax law in India consists of the following components:
1. Income tax Acts
2. Income tax rules
3. Finance Act
4. Circulars, notifications etc
5. Legal decision of courts.
Income tax Act, 1961: At present the law of income tax in India is governed by the Income Tax Act, 1961 which extends to whole of India, including the Sates of Jammu and Kashmir and Sikkim. It as administered along with other direct taxes by the Central Board of Direct Taxes (C.B.D.T.) The Board has framed various rules for the administration of income tax, which are known as the Income Tax Rules, 1962. They are amended and modified from time to time, as required by the amending Income tax Act. The Income Tax Act, 1961 is having 298 sections and many more subsections and twelve schedules.
Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.
Finance Act: Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act.
Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessee.
b)      Assessee.
Ans: Assessee [Section 2 (7)]: To mean a person by whom any tax or any other sum of money payable under the Act and include:
i)        Every person in respect of whom any proceeding has been initiated under the act for the assessment of his income or the income of any other person.
ii)       A person who is deemed to be assessee under any provision of the Act.
iii)     A person who is deemed to be an assessee in default in any of the provision of the Act.
Persons Liable to Pay Income Tax :
A. Following persons are liable to pay income-tax if their taxable income’ in a year exceeds the basic exemption limit for the year:
1.       Individuals (including non-residents),
2.       Hindu Undivided Families (HUFs)
3.       Association of Persons (AOPs)/Bodies of Individuals (BOIs) (where the individual shares of the members are known)
4.       Artificial juridical persons, such as, deities of temples
5.       Societies and charitable/religious trusts
B. Following persons are liable to pay income-tax irrespective of their income :
1.       All partnership firms (including limited liability partnership firms)
2.       Co-operative societies
3.       Companies
4.       Local authorities
5.       AOP/BOI where shares of the members are indeterminate or unknown.
c)       Scope of total income.
Ans: Section 14: As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.
(i)      Salaries,
(ii)    Income from House Property,
(iii)   Profits and gains of business or profession
(iv)  Capital gains
(v)    Income from other sources
Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B]
d)      Residence and tax liability.
Ans: As per Section 5 of the Income Tax Act 1961, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.
 In order to understand the relationship between residential status and tax liability, one must understand the meaning of “Indian income” and “Foreign income”. An Indian income is one which satisfies any of the following conditions:
1)      If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year, or
2)      if income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year, or
3)      if income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
 Similarly, foreign income is one which satisfies both the following conditions:
1)      Income is not received (or not deemed to be received) in India; and
2)      Income does not accrue or arise (or does not deemed to accrue or arise) in India.
Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income of an individual and HUF from a business controlled or profession setup in India will be taxable in the hands of resident and ordinarily resident and resident but not ordinarily resident but not in the hands of a non-resident. However, Foreign income from a business controlled or profession setup outside India will be taxable only in the hands of resident and ordinarily resident and not in the hands of a resident but not ordinarily resident or a non-resident person.
Foreign income of any other taxpayer (Company, Firm, AOP, BOI etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident in India. 
Tax incidence of different taxpayers is as follows—
Particulars
ROR
RNOR
NR
Income received in India
Income deemed to be received in India
Income accruing or arising in India
Income deemed to accrue or arise in India
Income received/ accrued outside India from a business in India
Income received/ accrued outside India from a business controlled outside India
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
No
No

3. (a) Explain the special provisions of law relating to tax holiday for newly established undertakings in free trade zones.                 14
Or
(b) Explain the special provisions of law relating to tax holiday for newly established 100 percent export-oriented undertakings.
4. (a) From the following information compute the taxable income under the head ‘Salaries’ for the assessment year 2014 – 15 of Mr. P who is a central government employee at Dibrugarh:                           14
a)      Basic salary – Rs. 30,000 p.m.
b)      DA (enters) – 60% of salary.
c)       Transport allowance for commuting from home to office – Rs. 2,000 p.m.
d)      Deputation allowance (for two months) – Rs. 3,000 p.m.
e)      Education allowance for two children at Rs. 250 p.m. per child and hostel allowance for two children at Rs. 450 p.m. per child.
f)       He has been provided with a rent free accommodation. The license fee for the accommodation has been fixed at Rs. 2,000 p.m. The government has also provided him with furniture items costing Rs. 1,00,000 (w.d.v. Rs. 75,000) for his personal use.
g)      He has been provided with the facility of a servant and a watchman with effect from 01.10.2013 and the government is paying Rs. 3,000 p.m. to each of them.
h)      A laptop costing Rs. 45,000 has been given to him for his official as well as personal purposes.
i)        On 01.04.2013, he took a loan of Rs. 1,50,000 from his employer to buy a car at a concessional rate of interest of 8% p.a. SBI rate of interest as on 01.04.2013 is 14% p.a.
j)        He paid professional tax of Rs. 3,000 p.a.
Ans: Computation of salary of Mr. X for the Assessment Year (2018-2019)
Particulars
Amount
Amount
a) Basic Salary
b) Dearness Allowance (60% of salary)
c) Children education allowance (250*12*2)
Less: Exempted @ 100 per month for a maximum of two children
d) Hostel expenditure allowance (450*12*2)
Less: Exempted @ 300 per month for a maximum of two children
e) Travelling allowance (No Exemption if standard deduction is claimed)
f) Deputation allowance
g) Use of laptop and computers
h) Salary of servants
i) Salary of watchman
j) Value of rent free house:
License fees of the house
Add: 10% of cost of furniture
k) Interest free loan (1,50,000*6%)


6,000
2,400
10,800
7,200






24,000
10,000
3,60,000
2,16,000

3,600

3,600
24,000
6,000
Exempt
18,000
18,000


34,000
9,000
Gross Salary
Less: Deduction U/S 16
(ia) Standard Deduction
(iii)Professional tax paid by employee


40,000
3,000
6,92,200


43,000
Income from Salary

6,49,200
Or
(b) What are the provisions of the Income-tax Act regarding the following?                         5+5+4=14
1.       Gratuity.
2.       Encashment of leave.
3.       Retrenchment compensation.
Ans: 1) Gratuity [Sec. 10(10)]: Gratuity is the sum paid by the employer to its employees in appreciation of its past services. Taxability of perquisites are given below for various types of employees:
Government employees
Employees covered under  Gratuity Act
Any other employee
Fully exempt
Minimum of the following 3 limits:
Minimum of the following 3 limits:
(1) Actual gratuity received, or
(2) 15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or
(3)Rs. 20,00,000
(1) Actual gratuity received, or
(2) Half months average salary of each completed year of service.
(3) Rs.20,00,000
Meaning of Salary:
(i) Basic salary plus Dearness allowance.
(ii) Last drawn salary (average salary of preceding three months in case of piece rated employee)
(iii) No. of days in a month to be taken as 26
Meaning of Salary:
(i) Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.
(ii) Average salary of last 10 months preceding the month in which event occurs.
(iii) Only completed year of service is to be taken.

2) Encashment of earned leave
Ans: Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits.
1. Leave encashed during service: fully taxable in which it is encashed
2. Leave encashed at the time of retirement
For govt. employee: fully exempted
For other employees: exempted upto minimum of the following
Ø  Notified limit Rs. 300000
Ø  Average salary x 10 months
Ø  Actual amount received
Ø  Average salary x no. of months leave due
Average salary = salary (Same as PF) for 10 months including the month of retirement / 10
Leave due is to be calculated taking one month leave or actual entitlement whichever is less
3) Retrenchment Compensation
Ans: Retrenchment Compensation [Sec. 10(10B)]
Retrenchment compensation received by an assessee at the time of his retrenchment, shall be exempt to the least amount from the following:
(i) Actual amount received
(ii) An amount calculated in accordance with the provisions of section 256F(b) of the Industrial Disputes Act, 1947 which is equal to 15 days average pay for each completed year of continuous service or any part thereof in excess  of 6 months,  
(ii) Amount specified by the Central Government, i.e. Rs. 500,000
5. (a) State the provisions relating to computation of income from house property.                         14
Ans: Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.
Ø  STEP 1 Determine the Gross Annual Value(GAV)
Ø  STEP 2 Determine the value of Municipal taxes
Ø  STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use. 
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)):  If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV.  If the ARR < ERV for any other reason, GAV = ERV.  If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil 
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)):  GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied:  GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value                                        ++++++
Less: Municipal Taxes                                     ++++++
Net Annual Value                                            ++++++
Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.
(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Limit of deduction u/s 24(b)
A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31st mar immediately preceding (Before) the year of completion.
B. In Case of Self Occupied House Property:  Max. Rs. 2,00,000 is allowed as deduction if the following conditions are satisfied:
Ø  Loan taken after 1 – 4 – 99
Ø  For construction/purchase (Capital expenditure) of house
Ø  Construction completed within 5 years from the end of financial year in which loan is borrowed.
Ø  Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
Or
(b) Mr. S owns a house property in New Delhi. From the particulars given below, compute his income from house property for the assessment year 2014 – 15:
Municipal value – Rs. 2,00,000
Fair rent – Rs. 2,52,000
Standard rent – Rs. 2,40,000
Actual rent (per month) – Rs. 23,000
Municipal taxes – 20% of municipal value
Municipal taxes paid during the year – 50% of tax levied
Expenses on repairs – Rs. 20,000
Insurance premium – Rs. 5,000
Mr. S had borrowed a sum of Rs. 15,00,000 @ 15% p.a. on 01.07.2012 and the construction of the property was completed on 31.01.2014.
Ans: Computation of Income from house property of Mr. S for the assessment year 2015-16 (Previous Year 2014-15)
Particulars
Amount
1. Municipal Rental Value
2. Fair Rental Value
3. Standard Rental Value
4. Expected Rental Value (MRV or FRV whichever is higher but limited upto SRV)
5. Actual Rent received or receivable less unrealised rent
6. Gross Annual Value (higher of 4 or 5)
7. Less: Municipal taxes paid (20% of MRV)
2,00,000
2,52,000
2,40,000
2,40,000
2,76,000
2,76,000
20,000
8. Net Annual value (6-7)
Less: Deduction under section. 24
(a) Standard Deduction @ 30%
(b) Interest on money borrowed (2,25,000+33,750)
Previous year (2014-15) = (15,00,000*15%)
1/5 of preconstruction period (1-7-12 to 31-03-2013) = 1/5(15,00,000*15%*9/12)=33,750
2,56,000

76,800
2,58,750

Income/ (Loss from house property)
(79,550)

6. (a) What are the powers of the Commissioner of Income Tax in regard to search and seizure under Section 132 of the Income-tax Act?                               14
Or
(b) State the scope of power of Commissioner of Income Tax. How does the same differ from the powers of Commissioner of Income Tax (Appeals)?

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